UNITED STATES OF AMERICA
In the Matter of
|ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER|
This matter involves Schering-Plough's violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act ("FCPA") (Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act), through certain payments made by S-P Poland to influence decisions by a Polish government official. Specifically, the Commission finds that, between February 1999 and March 2002, S-P Poland paid 315,800 zlotys (PLN) (approximately $76,000) to the Foundation to induce the Director to influence the purchase of Schering-Plough's pharmaceutical products within the health fund.3 None of the payments made by S-P Poland to the Foundation was accurately reflected on the books and records of Schering-Plough Central East AG. Additionally, Schering-Plough's system of internal accounting controls was inadequate to prevent or detect the improper payments.
The Silesian Health Fund was a government body that, among other things, provided monies for the purchase of pharmaceutical products and influenced the purchase of those products by other entities, such as hospitals, through the allocation of health fund resources. In February 1999, shortly after the Director assumed his position of leadership in the Silesian Health Fund, S-P Poland made the first of a series of payments to the Foundation.
In early 2000, the Director solicited S-P Poland's oncology unit manager ("the Manager") to make additional payments to the Foundation. Between March 2000 and March 2002, the Manager arranged for twelve additional payments from S-P Poland to the Foundation. Some of these payments were structured so that they were at or below the Manager's approval limit, apparently for the purpose of concealing the nature of the payments. Moreover, the Manager provided false medical justifications for most of the payments on the documents that he submitted to the company's finance department. In total, S-P Poland paid 315,800 zlotys (PLN) (approximately $76,000) to the Foundation, as summarized in the table below.
|Date of Payment||Payment Amount(in PLN and $U.S.)||Stated Medical Justification for Payments|
|1||2/23/1999||3,000 PLN ($777)||Covering fight against viral hepatitis|
|2||3/17/2000||20,000 PLN ($4,909)||Support of health campaign within county of Gilwice|
|3||7/19/2000||34,800 PLN ($8,065)||Financing second stage of health prevention campaign in Gilwice|
|4||11/8/2000||40,000 PLN ($8,766)||Financing for Foundation|
|5||12/20/2000||40,000 PLN ($9,292)||Financing second stage of research|
|6||3/19/2001||18,000 PLN ($4,340)||Financing lung cancer prevention program|
|7||3/22/2001||20,000 PLN ($4,854)||Financing screening examinations to detect skin cancer|
|8||4/25/2001||20,000 PLN ($4,958)||Support of lung cancer prevention campaign|
|9||6/4/2001||20,000 PLN ($5,019)||Support of lung cancer prevention campaign|
|10||10/29/2001||20,000 PLN ($4,878)||Support of a coronary disease prevention program and promote the image of the company in the medical community|
|11||12/18/2001||40,000 PLN ($10,067)||Support of an anti-chain smoking health program and promote the company as one that cares about the people of Silesia|
|12||12/19/2001||20,000 PLN ($5,067)||Financing of Foundation|
|13||3/25/2002||20,000 PLN ($4,868)||Support actions of Foundation in preventing infectious diseases of the liver|
|Total||315,800 PLN ($75,860)|
S-P Poland paid more money to the Foundation than any other recipient of promotional donations. During 2000 and 2001, the payments to the Foundation constituted approximately 40% and 20%, respectively, of S-P Poland's total promotional donations budget. Moreover, the Foundation was the only recipient of such donations that received multiple payments, making the four payments in 2000 and seven payments in 2001 highly unusual.
All of the payments to the Foundation were classified by S-P Poland in its books and records as donations. However, the Commission finds that, while the payments in fact were made to a bona fide charity, they were made to influence the Director with respect to the purchase of Schering-Plough's products.4 In fact, the Manager did not view the payments to the Foundation as charitable, but as "dues" that were required to be paid for assistance from the Director.
Prior to March 2002, Schering-Plough's policies and procedures for detecting possible FCPA violations by its foreign subsidiaries were inadequate in that they did not require employees to conduct any due diligence prior to making promotional or charitable donations to determine whether any government officials were affiliated with proposed recipients. For this reason, the Director of the Silesian Health Fund's relationship to the Foundation was never considered by S-P Poland as a potential FCPA issue.
The company should have been alerted to the fact that there were FCPA issues relating to S-P Poland's payments to the Foundation, because: (i) the Foundation is not a healthcare related entity, yet still received payments;5 (ii) of the magnitude of the payments to the Foundation in relation to the company's budget for such donations; (iii) of the apparent structuring of certain payments by the Manager, which allowed him to exceed his authorization limits; and (iv) the Director was the founder and Chairman of the Foundation and also a Polish government official with the ability to influence the purchase of S-P Poland's products by hospitals within the Silesian Health Fund.
The FCPA, enacted in 1977, added Exchange Act Section 13(b)(2)(A) to require public companies to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. The FCPA also added Exchange Act Section 13(b)(2)(B) to require such companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for assets. Issuers are also responsible for ensuring that their foreign subsidiaries comply with Sections 13(b)(2)(A) and 13(b)(2)(B).
As detailed above, S-P Poland made numerous improper payments to influence decisions by a government official in Poland. In connection with these payments, Schering-Plough failed to make and keep accurate books, records, and accounts as required by Exchange Act Section 13(b)(2)(A). Moreover, as evidenced by the extent and duration of the improper payments to the Polish government official by its foreign subsidiary, and the improper recording of these payments in the subsidiary's books and records, Schering-Plough failed to devise and maintain an effective system of internal accounting controls as required by Exchange Act Section 13(b)(2)(B).
As a result of the conduct described above, the Commission finds that Schering-Plough violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
Schering-Plough has undertaken to:
Retain, within 30 days of the issuance of this Order, an independent consultant ("Independent Consultant"), not unacceptable to the staff of the Commission, to review and evaluate Schering-Plough's internal controls, record-keeping, and financial reporting policies and procedures as they relate to Schering-Plough's compliance with the FCPA. Schering-Plough shall cooperate fully with the Independent Consultant and shall provide the Independent Consultant with access to its files, books, records, and personnel as reasonably requested for the review;
Require that the Independent Consultant issue a report within 150 days after being retained, recommending policies and procedures reasonably designed to ensure compliance with the federal securities laws as they relate to the FCPA. Simultaneously with providing that report to Schering-Plough, Schering-Plough shall require that the Independent Consultant provide the report to the Securities and Exchange Commission, Division of Enforcement (attention: Scott W. Friestad, Assistant Director);
Adopt all recommendations in the report of the Independent Consultant; provided, however, that within 60 days after the Independent Consultant serves that report, Schering-Plough shall in writing advise the Independent Consultant, and the Commission of any recommendations that it considers to be unduly burdensome, impractical, or costly. With respect to any recommendation that Schering-Plough considers unduly burdensome, impractical or costly, Schering-Plough need not adopt that recommendation at that time but shall propose in writing an alternative policy, procedure or system designed to achieve the same objective or purpose. As to any recommendation on which Schering-Plough and the Independent Consultant do not agree, such parties shall attempt in good faith to reach an agreement within 60 days after Schering-Plough serves the written advice. In the event Schering-Plough and the Independent Consultant are unable to agree on an alternative proposal, Schering-Plough will abide by the determinations of the Independent Consultant; and
Require the Independent Consultant to enter into an agreement that provides that for the period of engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Schering-Plough, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. The agreement will also provide that the Independent Consultant will require that any firm with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the Independent Consultant in performance of his/her duties under this Order shall not, without prior written consent of the Securities and Exchange Commission's Division of Enforcement, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Schering-Plough, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement.
Accordingly, it is hereby ORDERED, pursuant to Section 21C of the Exchange Act, that Schering-Plough:
(i) cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; and
(ii) comply with the undertakings enumerated in Section VI, above.
By the Commission.
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